Ethical Banking

Banks and buildings societies and the policies they pursue have an impact on the community around them. Their impact has two dimensions: the way they operate i.e. internal operations and the types of companies they help finance. Consequently the money that you deposit in a bank or building society could be being used to support activities that you object to.

What are the main ethical issues concerning banks & building societies?

The main issues that banks and building societies need to consider when forming their ethical policies, and that customers can evaluate them on, range from international questions such as whether they lend to the arms trade and their stance on Third World debt, to policies on the environment and social issues. The latter are particularly significant for building societies, as they usually do not offer overseas or business lending services. Many ethical issues such as the environmental conduct of business customers, are now part of standard risk assessment and prudent banking. It is becoming increasingly common practice for banks to have established guidelines for their staff on the major ethical issues covered below. For instance, many of the big high street banks have signed up for the Equator Principles, a set of guidelines developed by the banks for managing social and environmental issues related to the financing of development projects. The banks will apply the principles globally and to project financing in all industry sectors, including mining, oil and gas, and forestry. For more on this see: www.equator-principles.com. For a more critical view on some of the shortcomings of the Equator Principles, refer to: www.banktrack.org. BankTrack is a network of civil society organisations and individuals tracking the operations of the private financial sector (commercial banks, investors, insurance companies, pension funds) and its effect on people and the planet.

Some ethical investors prefer them to banks because of their mutual status (although many have de-mutualised, a number remain committed to their mutual status - their ability to be run by members for their joint benefit, rather than having to pay dividends to shareholders) and because the majority of their business comes from lending on homes and not from international banking services. Most mutuals allow each member a vote in the running of the company- regardless of the size of your account balance. For a list of mutual building societies, refer to the Building Society Association: www.bsa.org.uk.

Third World debt

The British government is committed to the World Bank and the International Monetary Fund's (IMF) Heavily Indebted Poor Countries (HIPC) initiative to eliminate unsustainable debt in the world's poorest countries. According to the British Bankers Association (BBA), most UK banks have either written off or swapped their poorest country debts. Swaps involve the repayment of debt being exchanged for undertakings by the debtors to reinvest the money, in local currency, in development programmes at home instead.

Lending to the arms trade

Any bank can decide not to lend to anyone directly involved with the arms trade, or supplying arms to particular regimes. Harder to control is where a customer's product finally ends up. Banks are taking different approaches to tackle these issues. Some banks will have policies on this, some will have guidelines rather than absolute exclusions, but more often than not such issues will be part of a bank's general risk assessment i.e. case by case assessment for making commercial loans.

Human rights and lending to oppressive regimes

The Bank of England publishes a Sanctions list of countries with which UK companies including the banks must not trade in any form while official sanctions are in place. Where there are no official sanctions in place, it is up to the banks to decide what they will do with regard to any lending within a country, and to businesses which trade with it. The risks of non-repayment and of adverse publicity will play a part in the decision process about a particular regime or region.

Environmental issues

Banks and building societies are being encouraged to take environmental issues fully on board, both with regard to their own use of resources, and to help customers to optimise the environmental impact of their conduct. This ranges from being prepared to lend to environmentally beneficial industries, to encouraging commercial borrowers to save energy (and costs) and to reduce emissions.

Charitable giving, and support for the community

Major banks and building societies give quite generously to charity, and some support the efforts of branch staff by matching any funds they raise for local causes. Several banks and building societies are in the Directory of Social Change's June 2000 list of the top 25 companies making the largest charitable and community donations. In fact Lloyds TSB and Northern Rock are ranked the top 1 and 2 respectively.

Social and financial exclusion

Back in 1999 a study by the Joseph Rowntree Foundation found that one and a half million UK households lacked even the most basic of financial products and, not surprisingly these people tended to live in communities with high levels of deprivation. With an increasing number of bank-branch closures and a rising consumer debt problem this figure has probably grown. A number of initiatives have been developed to tackle the problem. For example, the Money Advice Trust is a charity formed in 1991 to increase the quality and availability of money advice in the UK.

Triodos Bank

Triodos Bank is a specialist ethical savings bank with a "cause-based" approach. They only invests in businesses with social and environmental objectives - for example solar and wind energy, organic agriculture, nature conservation, education, healthcare, and culture, and projects in the developing world. Savers can target their money even further by choosing a partnership account where their money is used to finance a particular sector e.g. organic farming, or social housing projects. Triodos Bank was set up in the Netherlands in 1980 but also has branches in the UK. Personal and business savers are offered a range of services similar to most banks, but its business loans are only to organisations involved in sustainable development projects.

Ecology Building Society

The Ecology Building Society uses the money deposited by savers to offer mortgages on properties and projects that help the environment, such as energy efficient housing or renovating derelict properties. It offers a range of savings accounts, mortgages and ISAs. The Ecology Building Society, set up in 1981, is dedicated to improving the environment by promoting sustainable housing and sustainable communities. It uses the money deposited by savers to provide mortgages to those whose plans will be of benefit to the environment. The Ecology provides mortgages for energy efficient housing, ecological renovation, derelict and dilapidated properties and small-scale and ecological enterprise. Tel 0845 674 5566, www.joinred.com.www.ecology.co.uk

Co-operative Bank

The Co-operative Bank began in 1872 as the savings and loans arm of the Co-operative Wholesale Society. In 1991 its research found that 84% of customers wanted the bank to have a clear ethical policy, which it duly introduced. It will not lend to any companies involved in the arms trade, or whose conduct violates human rights. It supports enterprises with positive social and ethical intentions. Tel 0845 7212 212, www.co-operativebank.co.uk. The Co-operative Bank introduced its ethical policy in 1992, based on the concerns of its customers. It continues to be the only UK high street bank which gives its customers a say into how their money is used. It will not invest in any businesses involved in areas including the arms trade, abuses of human rights, genetic modification, intensive farming, climate change and tobacco while actively supporting areas like fair trade and social enterprise. The Co-op uses a blend of negative and positive screening. It will lend to companies which are involved with animal testing, but only for medical reasons. It will not lend to companies which export to oppressive regimes, but it does not exclude the armaments sector. On the positive side, the bank does support charities and positive business ventures which encourage fair trade and research into alternatives to animal testing. For more on the Co-op's ethical policy, refer to: www.co-operativebank.co.uk/ethics.

The Co-op Bank have an internet division called "Smile", which offers web based banking. December 2001 saw the first Ethical Policy Review to include Smile customers. During 2005, they turned away some 30 businesses (around £10 million in income) whose activities were in conflict with their customers' ethical concerns. At the same time, they directed significant monies to businesses whose activities were supportive of our customers' ethical priorities. Smile can be contacted on 0870 843 2265, or www.smile.co.uk.

Charity Bank

Charity Bank is the UK's first registered charity which is also a bank, regulated like other financial service providers by the Financial Services Authority. Set up by the Charities Aid Foundation, the Charity Bank's sole business is to accept deposits in order to make affordable loans for charitable purposes. Charity Bank describes itself as "the world's first not-for-profit bank". Individuals can open up a savings account and know that the money they invest is earning social as well as financial returns. Tel 01732 520029 www.charitybank.org.

Islamic banking

Islamic finance is based on Islamic values as defined by the principles of Shariah (Islamic law). The Islamic Shariah attempts to maximise social welfare (Maslahah) by protecting five 'pillars' of an Islamic society - faith, life, wealth, intellect and posterity. Consequently Islamic investment involves the screening out of those companies whose primary business does not conform with these objectives. More specifically the screening process will exclude companies whose activities relate to the following: alcohol; tobacco; gambling; armaments; pork; financial institutions; and pornography.

So the Islamic Shariah has a similar impact on investment selection as many guidelines used by ethical investors. Shariah law forbids paying or receiving interest, but dividends (paid on shares) are acceptable. Some 150 Islamic institutions currently manage US$100 billion for customers worldwide. Western banks like Citibank, ANZ, Barclays and HSBC also have Islamic banking arms; and share index-calculator FTSE International has created a Global Islamic Index series to measure the performance of companies complying with Shariah law. The Institute of Islamic Banking and Insurance is a source of further information on Islamic banking. Tel 020 7245 0404, www.islamic-banking.com.